LONDON -- European banks could next month take up to EUR400 billion worth of added funding from the European Central Banks' emergency borrowing facility, which could then lead to a reopening of funding markets, analysts from Morgan Stanley said in a report.

"The market still underestimates the potential impact of the ECB's support for banks to reduce systemic risk and thereby bank and sovereign funding. At this stage, we think the Feb three-year long-term refinancing operation (LTRO) could add EUR150 billion-EUR400 billion of ECB funding," Morgan Stanley said.

The ECB introduced the cheap, three-year financing last month to ease the strain on euro-zone banks, which were having trouble finding short-term funding because of worries about their exposure to the region's debt crisis.

At the three-year operation in December, the bank awarded EUR489.19 billion in bids from 523 banks. Until then, the ECB had never offered financing for more than a year.

In its report, Morgan Stanley said that "by reducing the risk of a systemic bank failure in the next couple of years, funding markets for the stronger banks are re-opening."

Morgan Stanley said that its "in-depth discussions" with 50 banks and policy makers suggest that banks may draw down further funding in the Feb LTRO, "with a reasonable number debating entering shorter-dated carry trades given the very weak profitability outlook. Larger banks and cross-border banks will remain guarded, but we think many domestic banks will be buyers."

It estimates that many Spanish and Italian banks have already pre-funded 50%-150% of their funding needs for 2012. It also showed that Royal Bank of Scotland Group PLC (RBS) used the three-year LTRO to cover a quarter of its 2012 funding needs by using its RBS NV subsidiary.

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